overnight repo

Overnight repo

Overnight Repo

A practice in which a bank or other financial institution buys securities with the proviso that the seller repurchase the same securities the following day. Financial institutions do this in order to raise short-term capital. See also: Overnight loan.

overnight repo

A repurchase agreement in which securities are sold provided that they will be repurchased on the following day. Financial institutions use overnight repos as a means of raising short-term money for financing inventories.

Under this setup, the overnight market rate (represented by the BIST overnight repo interest rate) can exhibit larger fluctuations inside the corridor and can move far away from the CBRT average funding rate (Figure 1).

The foremost reason behind this change in SBP's operational framework is to avoid excessive volatility in the money market overnight repo rate as this may create disconnect between short and long-term interest rates in the economy.

Second, the rate pressure should be greater in overnight repo rates than overnight LIBOR because of the timing of the two markets: The brokered repo market is active during the afternoon in the United States, while the London LIBOR-based Eurocurrency market is closed.

The article then examines the difference between general and specific collateral, defines the repo spread and dividend, presents a framework for determining the equilibrium repo spread, and describes the average pattern of overnight repo spreads over the auction cycle.

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